Futures trader and trading firm to pay $2.3 Million in penalties

The Commodity Futures Trading Commission (CFTC) issued two orders filing and settling charges against Victory Asset, Inc. (Victory) and Michael D. Franko for spoofing—bidding or offering with the intent to cancel the bid or offer before execution—and for the use of a manipulative scheme.

The scheme involved both domestic and international markets and occurred from at least May 2013 to July 2014 (the Relevant Period). One aspect of scheme involved cross-market spoofing—i.e., spoofing in one market to benefit a position in another market, where the price of the two markets is generally correlated, particularly in the short term. Franko is a trader who resides in New Jersey.

CFTC Enforcement Director Comments

CFTC Director of Enforcement James McDonald commented: “Today’s Orders show that the Commission can and will pursue spoofing and manipulation that stretches across different markets. I would like to thank the United Kingdom’s Financial Conduct Authority; the CME Group, Inc.; and the London Metal Exchange (LME) for their assistance in this case. Today, we highlight that, together, we will protect our markets from manipulative activities that cross different exchanges, markets, and even international boundaries.”

The two CFTC Orders require Victory and Franko to pay civil monetary penalties of $1.8 million and $500,000, respectively, and to cease and desist from violating the Commodity Exchange Act’s prohibition against spoofing and the Act’s and CFTC Regulation’s prohibition against the use of a manipulative scheme. The CFTC Order against Franko further bans Franko from trading in U.S. futures markets for a period of six months.

The Orders find that during the Relevant Period, Franko carried out his scheme by placing a relatively small bid or offer with the intent to execute that order (the Genuine Order) and then, prior to the execution of the Genuine Order, placing a larger order (the Spoof Order) with the intent to cancel that order before execution. In one aspect of his scheme, Franko placed the Spoof Orders and Genuine Orders in the same market (either copper, gold, or crude oil futures) and on the same exchange (either the Commodity Exchange, Inc. (COMEX) or the New York Mercantile Exchange). For example, Franko placed one or more Spoof Orders in gold futures on COMEX to benefit a Genuine Order in gold futures that he also placed on COMEX.

Another aspect of Franko’s scheme involved cross-market spoofing, in which Franko placed his Spoof Orders and Genuine Orders in different, but correlated, markets (i.e., copper futures on COMEX and LME). For example, Franko placed one or more Spoof Orders in copper futures on COMEX to benefit a Genuine Order that he placed in copper futures on LME, taking advantage of the correlation in price between these markets. Franko also placed one or more Spoof Orders in copper futures on LME as part of a scheme to benefit a Genuine Order he placed in copper futures on COMEX.

This case is brought in connection with the CFTC Division of Enforcement’s Spoofing Task Force, and the staff members responsible are Margaret Aisenbrey, Alison Auxter, Jordon Grimm, Jo Mettenburg, Elsie Robinson, Christopher Reed, and Charles Marvine.

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